Steep Drop in Natural Gas Prices Informs Major Shift at PSEG

Company tells analysts that power transmission -- not generation -- is focus of future investments.

Upgrades and extensions to the regional power grid are increasingly driving the profits of Public Service Enterprise Group, a reversal of the past trends and one that could have big implications for customers if power prices rise.

Public Service Electric & Gas, the company's regulated utility, plans to invest a staggering $5.4 billion in its electric and gas transmission and distribution systems over the next three years. Two-thirds of the expenditures are targeted at electric transmission, where the company earns more for every dollar it spends.

The capital expenditures, outlined to energy analysts Friday at the company's annual investors conference in New York City, underscore how much PSEG's corporate strategy has changed with the steep drop in prices power suppliers earn from the electricity they produce.

PSEG Power, the company's unregulated power supplier, is a prime example. It used to soak up the majority of the company's capital expenditures, and account for the bulk of its earnings. Its capital budget for the next three years is a modest $1.1 billion.

In 2010, PSEG Power earned 69 percent of the company's profits, compared with 27 percent for the utility. By the end of 2014, PSE&G is expected to provide 53 percent of its earnings, with PSEG Power generating the remaining 47 percent, according to Caroline Dorsa, the company's chief financial officer.

Paul Patterson, an analyst at Glenrock Associates, said the shift illustrates how the regulated utility industry continues to grow and the prices suppliers get for the electricity they generate continues to plummet. Power prices have dropped because of low natural gas prices.

"It has been a remarkable change," said Patterson of the reversal in profit drivers for PSEG. "They have done pretty well. It shows the adaptability of the company."

It also underscores the expansive extent of projects undertaken by PSE&G to upgrade its transmission system, including five major upgrades, all of which have won favorable incentives from the Federal Energy Regulatory Commission.

At the conference, PSEG officials said the investments are driven by mandates from the regional operator of the power grid, PJM Interconnection, to improve reliability as well as replace aging infrastructure.

The investments also will increase the amount of money the utility earns from its transmission system, which sends power from generating stations to substations. By 2014, transmission is expected to make up 41 percent of PSE&G's rate base, nearly doubling the 21 percent it accounted for in 2011, according to Ralph LaRossa, the president and chief operating officer of the utility.

The amount of money a company earns on its transmission system is decided by FERC. In the past few years, the state Board of Public Utilities and Division of Rate Counsel have protested the federal agency's handing out of special incentives, saying they should not be awarded to routine maintenance projects.

PSEG President and chief executive offficer Ralph Izzo, however, described the FERC decisions as "fair-minded" at the conference.

Further, company executives said lower commodity costs to power-generating stations are expected to offset the impact of the projects on the bills of its 2 million customers. "It's a small impact on the bill," LaRossa said.

Nevertheless, the spate of transmission projects have alarmed clean energy advocates and others, who question the need for them and worry they will lead to the wheeling of dirty coal power from the South and Midwest into the region.

The most controversial is the Susquehanna-Roseland project, a $750 million initiative that cuts through three areas of the national park system in the northern New Jersey Highlands. For that 145-mile expansion of a transmission line along an existing right-of-way, the company will earn 12.93 percent rate of return, far higher than the 10.3 percent it receives for projects on its distribution system, which delivers power from local substations to homes and businesses. The utility earns a 11.68 rate of return on its transmission investments.

Besides Susquehanna-Roseland, the utility plans to spend $895 million on its Northeast Grid Reliability project, a power line running from Hudson County to Essex County. Other big transmission projects planned by the utility include the North Central Grid Reliability project, a $390 million venture running from Essex County to Middlesex County; a $381 million project in Burlington and Camden counties; and a $435 million project in Gloucester and Camden counties.

At the conference, the company also announced it was looking at two possible sites, one in Middlesex and the other in Essex counties, to build a possible new gas-fired power plant.

"They are well-positioned to invest in market generation should the prices rebound," Patterson said. "They're keeping their powder dry, but they are ready to act."